If the term “homeowner loan” is unfamiliar to you, you are far from alone. Many potential borrowers do not know exactly what the term refers to. In this article, we will explain what homeowner loans are and how they can work for you. We will also explain how private mortgage solutions can benefit potential borrowers who need access to financing but have not succeeded in gaining approval from traditional lenders.
A homeowner loan is secured by the borrower’s residence. In order to be eligible for this type of loan, you need to own the residence free and clear or have some equity in the residence and make payments on a mortgage on the balance due. The property’s value and the equity you hold in it are the primary factors in calculating the amount you can take out in a homeowner loan.
Just as with other types of credit, such factors as your income and credit score will play a role. Because of the extended terms often associated with home loans, your age will also impact your eligibility. A homeowner loan is not the same sort of credit as those unsecured loans that require that borrowers own their residences.
Homeowner loans, whether taken through traditional lenders such as banks and credit unions or from private money lenders, allow borrowers to access the equity in their homes to pay for vacation homes, home improvements, other major purchases, or for debt consolidation. The exact amount available will vary among lenders and will rely on your individual circumstances and the accessible equity.
You will not be able to borrow the full amount of equity that you own. Fluctuations in the housing market mean that your home’s value could drop below the amount that you owe if you access the full amount, so the lender will have a maximum dollar value that you can take out, whether you use a traditional lender or private mortgage solutions. Because your residence serves as security for the loan, you will often have access to more money at a lower interest rate than you would if you took out an unsecured loan.
Once your loan is approved and funded, you will have monthly installments to pay. If the interest rate is variable, your monthly payments may not be the same. If your budget makes fixed payments a necessity, make sure to take a loan with a fixed interest rate.
Steps to Apply for a Homeowner Loan
- Refer to your most recent property appraisal to get a sense of your home’s current value. A formal appraisal may be a part of the loan documentation process as well.
- Decide how much money you need to borrow. Remember that this is a long-term loan with interest on each dollar, so if you are determined to take out a lump sum, get an accurate idea of the financing you need.
- Get an updated copy of your credit report to have an idea of the sort of lending you will have access to. If you don’t need the money immediately and can take some quick steps to boost your credit score, now is the time to do that. This could include such steps as disputing inaccurate accounts on your credit reports and getting your credit card balances as low as possible before the next statement dates.
- Shop your loan around, getting homeowner loan rates from different lenders. In addition to the available interest rates, also consider the closing costs and other fees associated with the loans. If you look at the APR (annual percentage of rate), this will give you the total borrowing cost that includes interest, fees, and any other costs.
- Follow the loan process required by your lender. This will involve submitting personal information and such financial records as bank statements and documentation about the property you plan to use as security.
Benefits of a Homeowner Loan
Taking out a homeowner loan can offer a number of advantages. Here are some to consider:
- Lower interest rates than other types of financing. Unsecured loans, whether personal loans or through credit cards, have nothing to provide the lender with recourse should you default on payments. Because the risk associated with unsecured lending is higher, the interest rate will be higher as well. In some cases, credit card interest rates can approach 30 per cent APR. Depending on your credit score and access to traditional lenders, your rate could be significantly less. Even if you need to use the loans for bad credit Ontario and other provinces offer, going with a homeowner loan will save you money with a lower interest rate.
- Access to more funding than you can get with an unsecured loan. While your credit score plays a role in determining the amount of funding you can obtain with a homeowner loan, another primary factor is the equity that you have in your home. If you own a $750,000 home free and clear, then you could have access to as much as between $487,500 to $562,500 as a homeowner loan, or even more, depending on the policies of the lender that you choose. Getting unsecured loans in that amount would be beyond the reach of just about every borrower.
- Access to funding for people with less-than-optimal credit. When you secure a loan with your home, you give the lender recourse if you end up defaulting on the payments. Even if you end up relying on the loans for bad credit Ontario and other provinces offer, that security can open the door to lending that would have remained closed without some sort of collateral.
There are also some potential drawbacks to consider before you sign the paperwork for a homeowner loan, so bear these caveats in mind.
- Default can lead to the loss of your home. Your home goes up as security on a homeowner loan. This works to your advantage in terms of lower interest rates and higher available loan amounts, but if you end up defaulting, the lender can foreclose on your home or power of sale (Ontario). If your homeowner loan turns out to be a second mortgage against the property, defaulting on EITHER loan can lead to foreclosure, so make sure that you can afford the new payment in your budget.
- Variable rates lead to variable payments. Some borrowers are lured into loans that offer a low interest rate at first, only to have that rate climb as the term goes by. When interest rates go up, the amount of your payment will increase. This will impact you more in the earlier years of the loan term as interest makes up almost your whole payment at the beginning, with the principal payments growing in proportion as the term goes by. You’ll want to account for this when budgeting for your new payment if you choose a loan with a variable interest rate.
- Debt consolidation can lead to greater interest expense over time. If you have existing debt that you roll into a larger homeowner loan, depending on the interest rate of the homeowner loan and the size of the new financing. You can also end up paying expensive closing costs and other loan fees; if those roll into the loan amount, you will pay interest on those as well.
How to Use Homeowner Loans Effectively
The best way to use homeowner loans involves correct budgeting, assessment of your borrowing needs, and timely repayment of the amount due.
Correct budgeting involves assessing your current financial situation to understand where a new payment would fit in with your current obligations. You may be able to find a lender who will allow you to take out money that you cannot afford to repay. In this case, that would put your home at risk. Even a new loan payment that makes your budget too tight can lead to stress.
Assessment of your borrowing needs involves determining how much you need to take out, instead of just taking out as much of your equity as you can. Remember – each dollar you borrow has to be repaid with interest. If you’ve already built equity in this house, then you’re actually paying interest on the same money twice now. So, get a precise dollar amount in mind, whether you’re using this money to consolidate debt, help your daughter with medical school expenses, or buy a vacation home, and then proceed with the loan process.
Timely repayment of the amount due, of course, means making your payments monthly. If you get an open loan, you can pay more each month and retire principal ahead of time – and save interest over the life of the loan.
We have mentioned private loan sources in this article; one question we often hear is “What are private money lenders?” These are individuals and businesses that lend money to borrowers who cannot qualify for financing through traditional lending sources, most often because of past situations that have reduced their credit score below what most banks and credit unions like to see. Private lenders offer short-term loans, often interest-only, to get that financing in the hands of borrowers so they can move ahead with their plans while also repairing their credit so that they can transfer the principal to a traditional lender at the end of the term.
Amansad Financial prides itself in working with a variety of verified private money lenders that are looking to assist borrowers with Homeowner Loans that are not ideal for traditional lending institutions.